7 of 10
BACKNEXT
Salesforce.com
Ticker: CRM
Market cap: $8.1 billion
2008 revenue: $1.1 billion
P/E ratio: 75*
Dividend yield: none

The popularity of "software as a service" is white-hot these days, and no provider is more identified with the business of renting software via the Internet (rather than selling and installing it on a company's servers) than Salesforce.com.

In part that's a tribute to the promotional powers of founder Marc Benioff. But it also stems from the fact that its products are widely viewed as appealing and easy to use.

Salesforce.com has lured in giant clients, including American Express, Avon, and Motorola. And the once-tiny outfit signed up 4,700 new customers during the last quarter, raising its total to 67,900.

"Salesforce is gaining against software companies like Oracle, Microsoft, and SAP because it is so much cheaper to use software in a cloud than to pay for a seven- or eight-figure software licensing deal," says longtime tech bull Ryan Jacob, who runs Jacob Asset Management and whose fund owns shares of the stock.

"Not only is that cost-benefit [equation] great in a weak economy," he says, "but as more companies use Salesforce and other software-as-service providers, this will become the standard model for companies with business software needs."

Salesforce is nobody's idea of a value play. It's a classic high-growth, high-price stock for those who want to buy into the premier player in an escalating tech trend.

Salesforce recently reported blowout third-quarter earnings, including revenue that jumped 20% and earnings that doubled from a year ago. Wall Street analysts anticipate annual earnings growth of about 16% for the next two years. The company has more than $1 billion in cash, or about $8.50 in cash per share.

But one metric slipped, and that worried investors: Deferred revenue, a measure of subscription fees booked for coming quarters, was down a bit from the previous quarter (though it has still risen this year).

Some shareholders took that as a sign that the company can't maintain its growth rate, and the stock slid 6%. It still commands a posh P/E of 75 -- but that's not outlandish for a tech stock. Some money managers say the recent slip helped reduce unrealistically high performance expectations for the company.

Michael Nemeroff, an analyst at Wedbush Securities, is comfortable with the stock's valuation. "Salesforce books expenses for getting a new customer upfront, and then recognizes the revenue from that new business over one to three years."

The result: Earnings are depressed in the near-term and then jump later. And Nemeroff expects reliable growth. "There are few companies where you saw growth in revenues and profit margins over the last year, and Salesforce was one of them."

NEXT: American Tower
Last updated December 09 2009: 10:19 AM ET
Email | Print | Share  |  RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
* Price/earnings ratios based on estimated 2010 earnings.
Stock picks from 5 pros With economic uncertainty near an all-time high, we sought the advice of some of the smartest market watchers we know. More
4 tech trends to watchTech investing is all about the next big thing. Here are the trends that could really pay off. More
3 ways to outwit the market At times the market acts the fool. Protecting yourself from its folly is simpler than you might think. More
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.